Make a new will – save a tax bill: How to avoid an inheritance tax (IHT) charge

14 June 2024 / Insight posted in Article

Inheritance tax (IHT) is charged on a person’s assets on their death. As the total value of estates above £325,000 is taxable at a rate of 40%, many consider taking advantage of the various reliefs available to reduce the tax bill and consequently increase their beneficiaries’ inheritance. One of the most valuable reliefs for business owners is business relief (BR), formerly known as business property relief. If the conditions are met, careful consideration should be given as to how to maximise its value. Assets that pass to a spouse on death do so free of IHT. Assets passing to other beneficiaries, such as children or a business partner, are chargeable to IHT.

This means, to avoid a charge to IHT on the first death, married couples and civil partners frequently have wills leaving everything to each other. Typically, their children then receive their assets when the surviving spouse dies. However, by leaving all the assets that qualify for BR to a spouse or civil partner, an opportunity to take advantage of the relief is wasted, as the spousal exemption will already exempt these assets from IHT.

Although BR has been part of the IHT framework for decades, its existence and the rules governing it are not immutable. In the period between the first to die and the death of the surviving spouse or civil partner, IHT can be subject to changing political and taxation priorities. It might be advisable to take advantage of BR while it is available. This can be achieved by drafting a will that passes business assets to someone other than a spouse or civil partner.

This crystalises the availability of BR on the first death rather than risk BR not being available on the second death. Testators may not be certain whether their spouse or civil partner will require the business assets, or whether it is suitable for their children to inherit the business. In these circumstances, they can include a discretionary trust in their will into which BR assets are placed. As no beneficiary has an automatic right to the assets, the testator can include a wide range of potential beneficiaries of the business assets.

If, on the testator’s death, HMRC agrees that BR applies to the deceased’s business assets, no IHT will be chargeable on these assets. Also, while BR continues to apply to the assets, there will be no ongoing IHT charges to which discretionary trusts are normally subject. This means the trustees can choose to transfer the business to the testator’s children free of IHT. If BR does not apply to the business, the trustees can transfer the business assets to the surviving spouse or civil partner within two years of death. Doing so will mean the spousal exemption will apply, so there will be no IHT to pay until the death of the surviving spouse or civil partner.

Alison Morris, a partner in the private client legal team, offers advice on the complex issue of IHT. To discuss more, please contact us.

First published in Business Times in Essex, republished here with kind permission.

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